The finance function can save audit

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Enron in 2001, Carillion in 2018: despite the regulations and precautions put in place in the accounting world to prevent shock crashes, 17 years later we have a feeling of déjà vu.

After Enron, audit practices were required to separate out their advisory and consultancy businesses and stop providing both advice and audit services to the same companies. In the intervening years, advisory arms have again been built up, and are again a source of contention.

In addition, the largest accounting practices have diminished from The Big Six to The Big Five and then The Big Four, and mid-tier firms have also consolidated their businesses. Despite there being more accountants out there than ever before, the choice of auditors and advisors for corporates continues to reduce.

Current suggestions for change to the accounting status quo have included breaking up the Big Four, requiring FTSE 350 companies to have two auditors, and placing statutory dividers between any audit and advisory arms of a firm.

These varying suggesting all share a theme: they all focus on the structure of audit practices or their relationships with client, in other words, how the businesses formally interact.

Yet is there not another type of change that could be rolled out, which would improve audit practices from within?

I’m pretty certain that almost all audit partners are audit lifers. They may have trained in the practice they now lead or have switched practices during their careers, but they are auditors through and through.

Audit firms now require their senior staff to do ‘Out of the Box’ roles, or secondments, prior to being accepted as Partner. But is this enough?

What if ‘making partner’ required more than a token stint in-house?

What if a pre-requisite for partnership was a minimum of 3 years in a non-audit role?

Not a secondment in the knowledge it’s a temporary project and you can soon return to the mothership, but a full-on leaving the audit firm, P45 in hand, taking a new job in a business and then having to re-apply and interview to join the audit firm again some years later.

Sure, you’d have to brush up on your FRS/IFRS/GAAP on your return, but think what else you would have learned on the coal face of an in-house finance team. What a great bank of experience you’d be drawing on for the rest of your audit career.

It’s standard practice for trainee auditors to conduct the bulk of audit field work. Some trainees are auditing cash balances after 1 or 2 weeks in the firm. They in turn are being trained on the job by more senior trainees, who again have never ‘done’ the job they are auditing. This perpetuates up the audit hierarchy: many auditors know the theory but have never put it into practice.

Now, if all senior auditors were experienced finance managers/controllers from in-house positions, think what a stronger position they would be in to teach their trainees and what an expert eye they’d run over the books.

They’d be able to think round issues caused by non-textbook scenarios or systems; understand how the balance sheet VAT account is meant to be used; know how to check currencies and FX rates; interpret lines of journal postings spouted out in a system audit trail and these are only a few of the things I’ve had to explain more than once to an auditor.

I’m fairly certain they’d conduct a more pragmatic and practical audit than their theory-only colleagues. And that their clients would value them far more highly as a result. I have always been delighted when I came across an auditor I could discuss an issue with, rather than having GAAP spouted at me with no practical application.

So why not make a gap in auditing essential to reaching the top?

The audit firms might not like this idea. Auditors may not like this idea.

It lengthens the path to the top and means changing jobs and business cultures. Some may fear a loss of audit talent, as ex-staff might discover that life outside of audit is more to their taste and not return to apply for partnership. (However, given the high levels of remuneration attached to partnerships, I suspect the magnetic pull will remain strong.)

Yet having a broad range of experiences is a great asset. Working in different cultures and seeing different ways of doing things is hugely beneficial, helps determine what ‘good’ looks like and brings fresh ideas to situaitons.

Auditors are frequently tarnished as being no good at putting theory into practice by their clients; so why not build audit practices with auditors who have first hand practical experience? Change from within as well as changing how the external relationships are structured and we may not have that sense of déjà vu in 2035.

About Kate Coles

Kate Coles

Kate Coles is a chartered accountant, business consultant, trustee and co-founder of enhance.finance, a coaching and mentoring business for FDs by FDs.

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17th Jan 2019 09:45

Same with corporate finance advisers.

I left practice in 2001 after qualifying in 1994 exactly because I felt uncomfortable advising clients on things that I'd never done in the real world myself. The only downside with making this compulsory is that, in my opinion, the finance world outside of practice is so much more interesting that many would not go back, and in time we'd end up with a dearth of auditors and oversupply in the commercial sector.

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By johnt27
18th Jan 2019 10:43

So, what you're asking for is some accounts experience in auditors. Just like small firms, who don't/can't departmentalise do?

This is a well known issue within the sector and any smaller audit firm will tell you that if you recruit an auditor from the big 4 they generally can't put a set of accounts together or know much about taxes. On the flip side their analytical review and controls testing will likely be lightyears ahead.

Big audit firms are more than capable of providing this kind of experience, either in house or on secondment but how do you legislate to implement such a change? And, how do you determine what non-audit experience is sufficient?

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29th Jan 2019 15:20

Extract above
'In addition, the largest accounting practices have diminished from The Big Six to The Big Five and then The Big Four,'
If this came up on only connect i my answer would be .....'then Big 3'

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